F.A. Hayek and Tyler Cowen

In the now “famous” 1932 letter to The Times of London signed by F.A. Hayek, Lionel Robbins, T. E. Gregory and Arnold Plant, we read:

The signatories of the letter referred to [by Keynes, Pigou et al.], however, appear to deprecate the purchase of existing securities on the ground that there is no guarantee that the money will find its way into real investment. We cannot endorse this view. Under modern conditions the security markets are an indispensable part of the mechanism of investment. A rise in the value of old securities is an indispensable preliminary to the flotation of new issues. The existence of a lag between the revival in old securities and revival elsewhere is not questioned. But we should regard it as little short of a disaster if the public should infer from what has been said that the purchase of existing securities and the placing of deposits in building societies, etc., were at the present time contrary to public interest or that the sale of securities or the withdrawal of such deposits would assist the coming recovery. It is perilous in the extreme to say anything which may still further weaken the habit of private saving.

And now we read Tyler Cowen at Marginal Revolution who is discussing the alleged problem of too much corporate saving:

Overall I am puzzled at the nature of the worry here. Corporations with cash surpluses are not destroying real resources, nor are they stuffing cash in their mattresses. They are investing in financial assets.

Take a financially conservative corporation, which holds its surplus in the form of T-Bills. If it bought the T-Bills fresh at auction, that’s lending money out to the government and the capital is still deployed. Isn’t that called…in some circles…stimulus? (I’ve even heard the multiplier might be 1.4! Or does only the borrower get credit and not the lender?) It’s trickier if the corporation buys the T-Bill on the secondary market, but still a) someone else has the money now, and b) this resale opportunity encourages other investors to buy freshly created T-Bills, thus putting capital in the hands of the government. In terms of final effect, there should be a near-equivalence between buying old and new T-Bills.

I am not claiming that they are making exactly the same point (but perhaps they are). But the similarities are patent. Perhaps this is another example of the continuing debate on the fundamental issues raised by Hayek and Keynes in 1932.

While the monetary “veil” often makes things seem a bit obscure, the fact is that the best of the Classical Economists — Adam Smith, David Ricardo, Jean-Baptiste Say, John Stuart Mill — were all fundamentally correct, when they said that whether income is spent or saved, it still generates employment and production.

And while we have set aside much of the Classical terminology with good reason, their distinction between “productive” and “unproductive” expenditure did carry the grain of truth that spending and resources devoted to “productive” purposes enhanced the wealth of the society over time since it mostly takes the form of capital formation and improvement.

And it is worth recalling J.S. Mill’s fourth fundamental proposition (which Hayek made a point of emphasizing in Appendix 3 to “The Pure Theory of Capital”) that the “demand for commodities is not a demand for labor,” as opposed to the Keynesian conception of “aggregate (derived) demand” as the engine of employment and production.

Did the Classical Economists sometimes jump over “transitional” adjustment processes too quickly. Perhaps, yes. But their fundamental analysis of how the economy works — even through the intermediation of money — still stands as the core bedrock of economic understanding.